Can equity markets sustain itself amidst rising rates?

Discussion in 'Economics' started by Lights, Apr 20, 2004.

  1. Bond yields are near historical lows, but rising. a 100 basis point rise on the 10 year would yield 5.4%, still low compared to historical means.

    Historically, have bull markets been able to survive in an environment where rates rise, and fed tighten?
  2. Problem is that looking historically and getting some type of average is not helpfull.

    Every bull market and bear market is different. You have to identify the major catalysts of the bull market.. which in this case is interest rates.

    The entire bull rally was spurred because of 3 major catalysts... cheap rates, tax cuts and china. Going forward in the comnig months and yaers those catalysts will no longer be there.

    What we will have next year... more lay offs.. outsourcing.. debt... real wages flat to minus... more inflation ( energy)... terrorist attacks.. etc.

    My point is.. if anyone thinks that this economic expansion is self sustainable w/o the catalysts in place is detached from reality.

    Case in point... look at a company like CIEN. Most of the earnings are coming from reduced costs by firing people. Companies are very effective at cutting costs and increasing efficiency. If companies can get cheaper labor.. that does the job.. why should they not outsource. What type of added value does an American worker really provide.. the answer is really very little. Not enough to justify paying 3-5x higher salary.

  3. Mecro


    I thought this bull rally was due to great earnings, in fact that is what you stated before. I do agree that it was completely due to cheap money since the earnings and job reports are a farce.

    If the masses and the pompous fund managers actually believe the earnings, then the market will sustain. CNBC is pumping it up well. Truly, it sounds like we are ready for another bubble and I hope it happens cause free money is always nice.

    I don't remember the exact numbers but there are billions waiting on the sidelines to enter the market. The masses' money has not been fully vested in the market yet. I think there will big one more bull run to fully sucker in the last joe shmoe and to rip the perma bears.
  4. The PE expansions occurring during the 1982-2000 Bull Market resulted, in great part, from falling interest rates. Certainly, other factors contributed to increasing equity prices; however, lower interest rates probably accounted for most of the change.

    That string has run out.

    If interest rates decline farther, then the global economy ain't gonna be supporting much growth (read: recession).

    If rates rise, earnings might grow, but PE compression will probably also occur.

    The equity market is stuck between a rock and a hard place. It's best case is probably to tread water for a long time.
  5. Good earnings is a by product of the catalysts mentioned. The question is... are these banking companies which compromise much of the S&P by a wide margin.. gonna be able to sustain this type of growth.. when the fed will be raising rates.

    I dont think so. The #1 factor that is fueling american spending (besides cheap money) in my opinion is confidence in regards to their house prices. Its an asset most american have that has made them fortunes and keeps on going up. I would feel pretty good too if I owned a house worth $1mil on the books today.. that I payed $300k just a few years.

    In my opinion if the real estate market caves in.. that will be the final blow to the American consumer. Most American people and business are highly leveraged.. which makes sense because money is cheap. But I dont think we are getting real sustainable growth going forward. Its not as if companies are expanding, paying out more to workers, plentifull jobs, innovation in the business arena. The truth its the exact opposite.. and the whole recovery is a smoking mirror.

    As far as the markets go... I will continue to short any rally in the broader indices. Its been working right now and since most market and sector indices are below the 50day MA.. i am a bit more agressive than usual.

    I expect the SP-500 to break 1000 and possible test the 800 level. The 800 levels will be reached under 3 different possible macro scenarios.. housing bubble burst (20-50% correction) , rampant inflation ( oil reaching $50+) , major terrorist attacks.

  6. Look at it this way...

    Disect the middle class American. Whats making them money?

    Stock market hasnt made them any wealth the past few years.. most are still down because they own CSCO at $50.

    Are they making more $ at work,, is their job safe? No. Real wages are flat to down... job market still very competitive with overseas eating much of it away. Only people making big money are the upper mgt. taking huge bonuses.

    Are they accumulating wealth.. saving into their nest egg.. healthy spending habits? Yea right... worst saving in history of USA. The fed has duped Americans into believing that borrowing up your ass is OK. Under %2 in savings for average American. The lowest in the modern world.

    How are their biggest assets doing.. their homes? Excellent. Easy money the past few years. Real estate has been where the money is being made. Huge paper wealth. Many Americans are duped to believe that their house prices are worth houndreds of thousands more.. and many are even millionaires on the books. Hey lets take out big mortgages.. no problem.. we are confident that house prices will continue to go up.

    Now for the first time in decades... we are getting a serious problem. Inflation and a FED that is hinting he will target this. Look at the costs of medicine, homes, cars, food, energy. Forget the CPI... that has so many wholes in it. Just ask your normal American household.. if they feel as if costs for everything are going up.. everyone I speak to agrees.

    The biggest joke of the whole thing is the jobs issue. First it was NAFTA and they told American farmers foget about farming we are too smart for that.. let the Mexicans do that for us... Americans should be at the cutting edge.. and study in computers and high tech... now corporate America is outsoucing this. Whats next?

    The truth is.. that Greenspan is old and his days on the FED are numbered.. all he did his whole life was make money cheap and promote this the culture of America. HE took the helm in 1987... and the general trend has been to keep rates down until they cant go any lower. Right now he looks like a genious... but when he is dead.. and people are looking at the economy In fifty years.. i wonder if he will be famous or infamous.

  7. Notice how we are getting these unbelievable earnings and the market is selling off into most of them. Thats because all of the reasons that these companies are doing so well.. will no longer be in place.. making next years comparables extremely difficult to beat.

    Regarding that suckers rally.. u might be right.. but it looks like that Jan. rally we had.. was the final blow off.

  8. Mecro


    We've had this convo before and I never believed the earnings in the first place. But that is what the April run up a year ago was based on, hence that is what the "experts" are supposedely looking for. The tax cuts did nothing, the cheap money just produced debt based consumption. The market was pumped up by manipulation and short squeezes.

    I watched Kudlow & Cramer today. They are pushing the idea that USA is coming to a time with great productivity, high interest rates and strong dollar. And quote "just like in the late 1990s under Clinton". This market is ready for a second bubble and Im all in. Bring ALL of the easy money to me.

    Otherwise it's gonna a grinding sideways market or even a slow bear market. Those SUCK.
  9. Kudlow & Cramer are the definition and example of financial media garbage.

    The only thing worth watching is CNBC World. I watch it at 1am EST. Excellent commentary.. its the real deal. THe people in the UK have their act together.. and they never hype. Their guest analysts that they have are much more honest and are not buy rah rah pinhead US fund managers.

    The difference between the clinton 90's and today is not even remotely close. For anyone to draw a parallel is detached from financial reality. The best analogy would be the 1970's. The interesting thing is that we are headed for stagflation... high energy prices, and even fighting our own Vietnam.

  10. I am always a fan of your critique Trend'. No punches pulled, nothing wrapped in candy.

    Nice job.

    #10     Apr 20, 2004